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Weekend Edition

If this single fact won't convince you... nothing will
Saturday, September 1, 2012

 We spend a lot of time discussing the merits of buying and holding world-class businesses that regularly increase their dividends. That's partly due to the specialty of Dan Ferris, who writes our income-focused 12% Letter... Buying these companies, which he's dubbed World Dominating Dividend Growers (WDDGs), has become a religion of sorts to him.
The other reason we spend so much time writing about these stocks is because buying and holding WDDGs is the safest and best way to get rich in the stock market. But it's boring... And most investors don't have the patience to simply buy a stock like Coca-Cola and do nothing (other than reinvest the dividends) for 20 years.
 It's too bad, though. Legendary investor Warren Buffett bought Coca-Cola stock 24 years ago. And his investment pays him $100 million each quarter in dividends. Buffett says in 10 years, the annual dividends from his Coca-Cola stock will exceed what he originally paid for his position.  
Yes, Buffett is putting much more capital to work than you and I are... But we can still achieve the same investment result on a smaller scale. It simply takes careful stock selection and patience.
 Take one of our favorite dividend-paying stalwarts – Altria Group... The company recently raised its quarterly dividend from $0.41 to $0.44 – a 7.3% increase. After the dividend hike, the stock yields 5.2%.
This was Altria's 46th dividend increase in the last 43 years. The company says it aims to achieve an 80% dividend-payout ratio... You calculate the payout ratio by dividing what the company spends on its dividend by earnings. Based on Altria's current earnings and $0.44 quarterly dividend, the company has a payout ratio of 74%.
To achieve its goal of an 80% payout ratio, Altria would have to boost its quarterly payout to $0.48 – a 9% increase from today (assuming earnings stay constant).
 And if history is any indicator, Altria will reach its goal.
Dan commented on Altria's dividend boost. His response is below... 
Altria consistently generates higher returns than anybody expects. It has outperformed the S&P 500 every year from 2000 through 2011 (and is on track to do the same again this year). Everyone is afraid of getting into the cigarette business, because cigarette smoking is on the decline in Altria's market (the U.S.). So the stock price stays relatively cheap, and the dividend yield remains relatively high. With the new dividend hike, it's yielding more than 5%, compared with the S&P 500's yield of around 2%.
But it keeps making money because it owns the U.S. cigarette market like no other company. Its top brand – Marlboro – is by far the No. 1 brand in the market, with a 42% market share. Altria has about half the U.S. tobacco market when you add its other brands into the mix.
So... people keep smoking. And Altria keeps selling them more tobacco than any other company, making huge profits (more than $6 billion last year), and it keeps generating huge amounts of cash and paying out most of it to its shareholders in dividends.
 Altria has been in The 12% Letter's model portfolio since November 2008. Since then, subscribers have made 149% on the recommendation. That includes $6.70 in dividend payments per share. Based on an initial purchase price of $16.50, subscribers have made 40% in dividends alone. In other words, without the dividend, you'd only be up 109% on your Altria position.
 Dan recommended Altria to his Extreme Value subscribers in March of that year. Accounting for the spinoff of Philip Morris International – which occurred later that month – Extreme Value subscribers are up more than 90% on the total position.
 You may think Altria is an extreme example... The company relentlessly raises its dividend. And it regularly outperforms the market. But it's not so extreme... In the April 3 Digest, we discussed research from Standard & Poor's showing just how important dividends are for investors: 
According to Standard & Poor's senior index analyst Howard Silverblatt, if you go back to the end of 1989, a $10,000 investment in the S&P 500 would be worth $40,154 in capital gains... and reinvested dividends would add another $24,396, for a total value of $64,550 today. So reinvested dividends made the difference between a 302% gain and a 546% gain. (Nothing like an extra 244 percentage points to get your attention.) 
In the 1980s and 1990s, dividends went out of style. During the '90s, dividends generated less than 20% of stock market returns. When a bull market is raging, capital gains become more important and dividend yields fall. Also, the tech companies that contributed the most to the '90s-era frenzy were less inclined to pay out dividends. It was believed they'd do better by retaining capital and reinvesting in their businesses. All of that convinced investors that dividends were not important anymore.
But historically, dividends have been very important. Going back to 1926, dividends have provided about 41.85% of the total returns from stocks, Silverblatt reported. The pendulum has been swinging back in the direction of dividends for more than a decade now, and I expect it'll continue to do so for another decade...
 For almost the past 100 years, dividends have provided investors with nearly 42% of their total return from stocks. If that single fact isn't enough to convince you to buy WDDGs, nothing likely will... But we'll still try.
 If you're looking for the highest-quality, highest-yielding stocks to put money into today, we'd advise you to try a subscription to The 12% Letter. You can stock your portfolio with WDDGs and watch your dividends increase and your gains compound over the years...  
This is one of the most valuable newsletters we publish... And we want to make it available to everyone. That's why we charge as little as $39 to sign up. And if you decide the service isn't for you any time within the first four months, we'll refund 100% of your money. Click here to learn more about The 12% Letter.
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